General Dynamics Deal Worried Board

While the Newport News Shipbuilding Board of Directors approved General Dynamics' $2.6 billion buyout offer, directors had their reservations.

Board members worried about such things as the $50 million deal-termination fee, restrictions on Newport News regarding rival offers, and the possibility the local shipyard's stock value would suffer if the deal fell through, according to documents recently filed with the federal Securities and Exchange Commission.

As it turns out, concerns about a rival offer proved genuine with the arrival of Northrop Grumman's intended bid. If Newport News Shipbuilding accepts that offer instead, that could lead to the termination fee payment.

Some reports have questioned whether the threat of the $50 million fee would be enough to kill the unsolicited but similar buyout offer from Northrop Grumman. "Let me put it this way," Northrop Grumman spokesman Randy Belote said. "We knew about that termination fee before we made the offer."

As for who would pay the penalty should Northrop Grumman prevail, Belote said, "We'll worry about that when we get to that point. We are not going to speculate right now."

Apparently, at least some board members felt they should have considered other options before accepting the General Dynamics' offer. Listed under "negative considerations" for the proposed deal, the SEC shipyard filing reported that the board worried about:

"The fact that the company did not solicit alternative proposals from third parties, and consideration of whether parties other than General Dynamics would be willing or capable of entering into a transaction with the company that would provide value to the company's stockholders superior to the cash price to be paid pursuant to the offer and the merger."

Fricks and other board members certainly knew about the Navy's concern about loss of competition under the proposed Newport News Shipbuilding-General Dynamics combination, because the Navy said so when General Dynamics tried to buy the local shipyard in 1999.

And board members apparently discussed that issue as a "negative consideration," too: specifically, "the position taken by the Department of Defense in opposition to the General Dynamics proposal to acquire the company in February 1999, the risk that the offer and the merger may not be consummated and the resulting consequences to the company, including the possible adverse impact on the market price of shares."

The effect on share value is hard to determine. One concern is that investors may deem the $67.50-per-share offers by both General Dynamics and Northrop Grumman to be too high, if both offers fail.

Most analysts and company executives feel that an all-out failure of a buyout is unlikely. Despite any competition concerns, the analysts say, the government is likely to agree with the Newport News board that there's more to be gained than lost in a corporate combination.

Michael Fabey can be reached at 247-4965 or by email at mfabey@dailypress.com